Q2 2021 Gibraltar Industries Inc Earnings Call
Greetings and welcome to the Q2.2021 Gibraltar earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad and the reminder.
This conference is being recorded and.
And it's now my pleasure to introduce your host Carolyn Kay pocket of Alicia. Thank you Caroline you may begin.
Thanks, Paul Good morning, everyone and thank you for joining us today with me on the call or bill by the wage of broker industries, President and Chief Executive Officer, and Tim Murphy, Gibraltar as Chief Financial Officer. The earnings press release that was issued this morning as well as the slide presentation that management will use during the call are both available and the and.
That's the section of the company's website at Gibraltar and 1 dot Com. Please note that Gibraltar has classified the industrial business, which was divested on February 23rd and 2021 and the discontinued operation with fourth quarter 2020 result.
The terrorist smart, which was acquired at the end of December 2020 are included in first half 2020.1 results.
Gibraltar earnings press release, and remarks contain non-GAAP financial measures tables, and reconciliation of GAAP to adjusted financial measures can be found and the earnings press release that was issued today.
Excuse me.
So as noted on slide 2 of the presentation. The earnings press release and slide presentation contain forward looking statements with respect of future financial results. These statements are not guarantees of future performance and the company's actual results may differ materially from the anticipated events performance or results expressed or implied by these forward looking statements.
And for alter and advises you to read the risk factors detailed in its SEC filings, which can also be accessed through the company's website now and I'll return the call over to build the bill.
Hey, good morning, everybody and thank you for joining today's call. Let's start this morning with an overview of the second quarter results and then we will discuss the ongoing market environment, we continue to manage and.
Tim will then provide a detailed financial review of the quarter and and then I'll give you an update on our 2021 strategic priorities and our guidance for the year.
And then we'll open up the call for your questions. So let's start let's turn to slide 3.
And we delivered solid quarter.
With revenue of 36, 5%, 14% of which was organic and 22.5% came from acquisitions and we got off to a good start and the first quarter with 34% growth.
And the momentum accelerate into the second quarter growth was driven by healthy and market demand further participation games and the realization of multiple price actions implemented and the first and second quarters, and total or our order backlog, which reflects sign contracts grew 54% to over $400 million.
A record level and really for Gibraltar and on a pro forma basis order backlog grew 32% again, reflecting the accelerating order momentum as we exited the strong first half of 2021.
The integration of tariffs Martin is on track and we continue to evolve into 1 organization. We're 6 months each of the process and have somebody and sales marketing and.
Apply chain finance HR and had a strong leadership team in place.
The operating margin nearly doubled versus the first quarter and demand remains robust as man and the second half of the year historically, the strongest quarters for this business and for the solar market.
And our residential business architectural mailboxes completed its third full quarter of integration activity and is delivering to plan as well.
Adjusted operating income increased 8.2% and adjusted EPS, It's been 6.7% to.
The <unk> 80 per share although of margin contracted during the quarter, our success and implementing various price actions and productivity initiatives helped offset a large portion of the macro headwinds that accelerated during the quarter and drive positive growth and operating income are macro headwinds included ongoing inflation materials labor and freight and the supply and availability of materials labor and transportation.
Asia as it relates to the reemergence of Covid, we maintained our operating protocols to the quarter and were able to minimize disruption of accordingly.
So, let's turn to slide 4 and so I can share with you a little bit about inflation and supply chain dynamics.
So let me provide some context, considering the macro headwinds and the the environment. We continued operating and I realize there is plenty of debate and opinion regarding the inflation going forward regardless of June was the ninth month and ROE with the significant market increase for core input cost and inflation continues to accelerate and July as well the.
Magnitude of the increase combined with the speed and which it has occurred is really unprecedented and I think it's been surprising for many industries for.
For example in January of 2020.
And the good economy and prior to the pandemic. The C are you price for hot rolled steel was $570 per ton.
And really over the next 9 months by September 32020 of the price and increased 5.1% of.
$599 per ton and con.
Contrast between September 30 of 2020 and June 30th 2020, 1 another 9 months period.
Gee are you price for hot rolled steel increased 188% of 1000 and $723 per ton and during July and increased another 4.8%, surpassing <unk> hundred dollars per ton.
The net result of hot rolled steel pricing is more than 3 times higher and a market where demand levels today are actually less and they were prior to the pandemic.
And further input cost of materials has risen as well with aluminum about 50 per cent resins up 97% of transportation rates up 29% over the same timeframe. So there are a number of reasons for caution and today's situation the way.
And that's the reductions during the pandemic labor shortages tariffs import duties.
Supply capacity management strategies and other macroeconomic questions.
But our expectations are these issues will continue in 2021.
So yeah. It has been a tough and fast moving environment and we expect it will continue and we will remain proactive and attacking our inflation and supply chain challenges as discussed and our first quarter earnings call.
We started engaging customers and suppliers and the fourth quarter of 2020 and also start hopefully in the first round of price increases with subsequent of price actions as inflation accelerated.
Supply agreements with our customers specifically within our residential customers.
Include commodity index, and clauses that support price changes and.
And also a well defined process and timing for approval of implementation of changes. This does create a natural lag for price realization relative to commodity increases and and the second quarter, resulting in margin contraction force, especially given the sharp and substantial cost increases and steel aluminum and resin the.
Historically, though the price realization lag has been anywhere between 1 to 2 quarters once inflation turns down now and tell this happens we will continue to implement necessary price actions and really focus on maximizing operating profit dollars and.
And input costs do start to fall, a well managed price of quarterly to facilitate a margin recovery.
And we've also continued to work to execute our 80.20 initiatives that we had planned going into the year.
And we're staying very close to our suppliers and trying to stay in sync with our customers at the same time.
I think all of these efforts have helped us manage relatively well and the current environment and.
And this quarter's results.
With that let me turn it back over the time and we'll give you a little more detailed review of all of our results Ken.
Thanks, Bill and good morning, everyone.
I'll take you through our consolidated and segment results and as a reminder of my discretion of couple of results from continuing operations.
Consolidated revenue increased $36.5 per shot to $348.4 million organic revenue growth of 14% was driven by continued execution on strong demand participation gains and pricing and all 4 segments. Despite some supply chain dynamics of materials and the labor availability.
And particularly in the renewables residential and AG Tech segments.
We generated 22 and a half of shunt growth from the 2020 acquisitions of architectural mailboxes, SUNFISH and Taro smart.
Total backlog at quarter end exceeded 400 million up 32 per cent.
All of her second quarter, 2020 on a pro forma basis, driven by continued end market demand across our business.
Adjusted operating income increased 8.2% in the second quarter with adjusted EPS of $6.7 per cent. The increase was the result of continued execution of a solid demand across the business segments of the drove organic growth as well as tariff smarts acquisition and 80.20 productivity initiatives.
Partially offset by the timing and alignment of higher input costs and price increases supply chain disruptions and and the AG Tech and renewable segment shifts and project timing.
As Bill commented, we continue to work with suppliers to manage materials and transportation procurement and with customers to manage pricing.
We expect margins to recover as inflation subsides with the 1 to 2 quarter lag.
Now, let's review each segment, starting with slide 6 the renewable segment.
Segment revenue increased 92, 5% driven by the terrorist smart acquisition as well as organic revenue growth of 4 per cent.
On a pro forma basis, including the tariff smart transaction revenue grew 25 per shop.
Revenue growth accelerated sequentially from 88% last quarter and we.
We achieved this growth through solid execution and converting strong backlog into revenue despite solar industry headwinds of significant input cost inflation.
Fly chain challenges, particularly with panels that impact our customers and ability to finalize the design and Pos project timing delays and the impact of the Safe Harbor ITC extension announced in December of 'twenty, and 'twenty with sharp to remove incentives for developers to build early in 2020.1.
Demand continues to be strong across our broad offering of fixed tilt tracker canopy and he bought the product solutions, serving the community commercial and industrial market segments backlog ended the quarter over $218 million up 54% on a pro forma basis across our entire solar business.
Adjusted operating income improved 45, 2%, while adjusted operating margin contracted 380 basis points. The majority of which was expected from the integration of terrorist smart.
The remaining margin contraction of approximately half was related to a onetime tariff credit received and the second quarter of 2020 with the remainder of the result of timing and a lot of and the price actions with input cost inflation and project movement related to supply chain schedule a logistics challenges.
The terrorists part of integration is delivering the results as expected with adjusted operating margins nearly doubling sequentially and as demand continued to accelerate and we began to implement implement simplification initiatives.
Terrorist smart remains on track with its full year margin plan.
Let's move to slide 7 and review of our residential segment.
Segment revenues increased 17, 7% driven by increased pricing and volume despite supply chain dynamics related to material labor and logistics organic revenue grew 12% and the acquired architectural mailboxes business contributed 6% growth with the integration of this business on track.
Segment, adjusted operating margin decreased versus last year, driven by the impact of accelerated inflation material and labor availability and the timing and alignment of price actions with the input costs.
And we anticipate and disinflationary environment, we've implemented multiple price increases since the beginning of the year.
The timing of these adjustments is not in lockstep with the accelerating inflation and going forward as inflation begins to moderate we expect alignment between pricing and cost improvement and the operating margin total tower, which historically of curves 1 to 2 quarter time period past the cancellation fee.
During this transition will continue and maximize operating profit dollars with a focus on continued alignment of selling prices with the input cost execution and 80.20 initiatives.
Let's move to slide 8.2 of your egg type of segment.
Segment revenue increased 27% with solid activity across the programs Marshall Carwash retail and processing of equipment segments of sequential improvement despite the rescheduling of delays and expected projects.
On a number of projects from the second quarter into the second half of 2021.
The permit delays re scoping of projects and supply chain disruptions.
For example of 1 of our larger Proteus projects imported glass for a greenhouse roofing system, we're still eat in the west coast Port for more than 11 weeks waiting for the Port authority to move the containers 2 of carrier for delivery to our job site.
Like many other companies of the port authorities challenged from finding labor to increase capacity to support increasing demand.
Segment adjusted operating income was flat year over year with adjusted operating margin contracted year over year due to business mix and the movement of projects into the second half of the year, because I, just mentioned higher input costs and logistics challenges.
These headwinds, which we view as temporary were partially offset by improvements of the legacy greenhouse structures cannabis greenhouse structures and cannabis and hemp processing the equipment businesses, which are encouraging.
And on a sequential basis adjusted operating margin expanded 180 basis points as the processing equipment business continued to improve along with continuing benefits of the integration of the proteins business.
That type of order backlog of experienced a temporary contraction during the quarter followed by July of customer order activity that is accelerating backlog momentum and the segment remains on track with expectations for the year.
Let's move to slide 9 to review our infrastructure segment.
Segment revenue increased 29, 7% driven by demand for fabricated and non fabricated products and increased estate D. O T project funding important with the strengthening of the U S economy.
For the backlog increased 11% over $46 million during the quarter, indicating growing strength across the business.
Segment, adjusted operating income and margin expanded from last year, driven by favorable mix of higher margin band fabricated products and solutions strong execution on higher volume overall and continued investment and 80.20 productivity initiatives.
We also continued to improve our manufacturing processes during the quarter, allowing the team to shift labor between production processes and combined with better material flow of reduced lead time significantly.
And let's move to slide 10 to discuss our liquidity position.
We generated $14 million of cash from continuing operations and the quarter driven by higher net income and increased accounts payable, partially offset by increased inventories and accounts receivable, which at the end of the seasonally strongest quarter.
We generated $8 million and cash from investing activities was $13 million of cash collected on the note related to the sale of the industrial business, partially offset by capital expenditures of $5 million.
Cash used in financing activities of 25 million was mainly the result of net repayment of $25.8 billion of outstanding bonds.
At June 30th we had 360 million of available on our revolver.
Cash on hand of $17 million and our net leverage was slightly less than a quarter of term.
We continue to expect to pay the remaining $33.2 million balance on our revolver part of year and using cash flow generated from operations.
Our operating model generates high cash flow with relatively modest capital expenditures offering us ample liquidity to invest and operational excellence organic and inorganic growth initiatives organizational development and to repay debt.
We remain in active M&A discussions and remain focused on managing working capital.
Now I'll turn the call back to Bill.
Thanks, Tim, Let's turn to slide 11, and 4 and I'll give you a quick update on our key priorities for the year at the start of the year, we communicated really 4 key priorities important executing the business in 2020.1.
The 4 business priorities remain very aligned with today's environment and.
And obviously, we're very active and focused on and off shore.
As a reminder of our priorities are first and foremost scale of our renewables and I take business businesses as mentioned earlier.
We are making good progress integrating terrorist smart well executing of very high demand environment with the dynamic supply chain situation and we continue to build processes drive scalability and integrate our key functional areas.
A broad and evolving solar portfolio, which really is the broadest a turnkey offering and the market is is resonating well and the market and the with 6 months into the acquisition of results relative to our expectations and ex and acquisition plan and demonstrate.
Our strategy is working.
Yeah I take business is also making progress and the demonstrated the sequential improvement we expected as we move through 2020.1.
And as we exit 2020, 1 we expect the AG Tech revenue growth and margin run rate performance the surpassed 10 per cent.
The Gration of Thermo is expect to drive positive results and the second half along with the market recovery of our cannabis and process and equipment businesses and.
And the steady growth and our legacy business right Tech presence of strengthening and our M&A strategy is working here as well.
The second party was the managed inflation optimize the supply chain, we already discussed the environment and how we've managed to date and our continued focus going forward I do want of mentioned we are accelerating our additional 80.20 projects.
Just really on developing and implementing automation solutions to better optimize labor management from key facilities and in 2020.2.
And thirdly, our focus on improving our execution with continued folks and health and safety 80, 20 productivity initiatives, new product development capability and quality control systems, you know in today's environment of our ability to consistently execute is helping us navigate through the year and deliver our plan.
We must also stay diligent and driving our health and safety of progress as we move into our busiest quarters.
Demand of supply chain labor challenges and and deal with the reemergence of Covid and finally, we have continued with our investment and our business systems ERP CRM H R. I S and quality system implementations.
Which I believe will drive additional productivity and scalability across our businesses and finally fourth.
Particularly and its kind of environment, just 1 of continued to conduct business, the right and responsible way each and every day.
And how challenging or complex the operating environment, We've got and continue to focus sorry from some drive environmentally sound solutions for solar energy production.
Growing and residential efficiency as is the while acting responsibly and helping to support our people customers and suppliers.
Let's move to slide 12, and and we'll discuss our outlook for 2020.1.
So we do remain confident and our existing full year 2021 guidance for both revenue and earnings which we are reaffirming today.
Although we expect the current business environment to continue through the second half of the year, our first half performance with revenue up 35% adjusted operating income up 17% adjusted diluted EPS of 15% flex our ability to operate in this environment and our first half performance is also consistent with our historical first half.
Pattern.
We're also well positioned with good demand and in markets, where the second half of seasonally the strongest.
Of record order backlog and a very healthy balance sheet.
And I look also includes profitability improvement and each business. The continued focus on daily execution.
Driving the acquisition integrations and further strengthen the organization operating systems.
We continue to expect consolidated revenue and the and the range between $1.3 billion and 1.35 billion.
GAAP EPS from continuing operations and the range between $2, and 78 and $2.95 compared to $2 and 53, and 2020 and adjusted EPS from continuing operations and the range between $3.30, and $3.47, compared to $2 and 32 and 2020.
And finally look I want to thank our entire team and our board of directors, our suppliers and customers for their support.
And their focus and diligence and actually in today's environment, and it's been extraordinary 18 months and.
And our team has and continues to perform and an extraordinary way and I'm really excited about what's in front of us with that we'll open the call up for questions.
Thank you well now be conducting a question and answer session. If you would like to ask the question. Please press star 1 on your telephone keypad. The confirmation tone will indicate your line is and the question Kipp you May press star 2 and people would like to remove your question from the queue for participants using speaker equipment and they would be necessary to pick up your handset before.
The press and historically.
1 moment, please while we poll for questions.
Yeah.
Thank you. Our first question comes from Ken Zenner with Keybanc capital markets. Please proceed with your question.
Good morning, everybody.
Hey, Ken good.
Morning, Ken.
Just if we could spend a little time on renewable and appreciate the slide 4.
Guys in terms of the steel cost inflation.
And I Wonder if you could put <unk> in context of some of the comments you made and 1 Q I'm just so we can understand where the.
The margin differences are coming and I think that's you know, obviously and an appropriate focus for investors so and the first quarter slide on renewable you talked about a 50 basis point lift and the legacy business could you if if if.
If the appropriate could you please update us if that how that organic moved and I'm asking Tim. So you can kind of force rank what the other cost pressures Rx it sounded like the terrorists March.
Steel and there was a credit tiny but I just want to see all of the legacy business day and then the other drivers please.
Yeah. So so can the the tariffs Mark was just it's sort of planned operating margin was the biggest impact.
And next in line was this.
And this that and each other 2 items are really on the core business.
So we got in the second quarter last year, we got the benefit of a.
The 1 time pair of credit.
And that had built up over and it wasn't just related to that quarter. It was.
Just when we were able to get it back and then.
Third and and less impactful and care of credit was the just timing of the price material.
Interesting.
So I guess it does sound, though to just to stick out of the legacy the legacy was down year over year led by the tax credit and then steel cost. So it's not steel costs was only.
And it wasn't the the main driver here and the operating margins.
Ottawa and not the main driver, but there is an impact.
Oh yeah.
Yes.
Don't think of it as great as are the perhaps the industry would of thought given that steel costs are so incredibly robust.
The robust despite the spread and the U S. You know and the international prices I think scrap rolled over 60 days ago is there any.
And I think you guys have been better buyers and steel and then others, perhaps would have expected but is there a increase could you talk to these price index is I guess bill that's what I'm talking about and how customers are responding to such robust pricing, which seems necessary in order to maintain your margins.
Yeah. So you know theres a number of variables that customers are thinking through depending on which.
Business, but in the solar world.
Go back and remember the the 4 per cent benefit or.
The elimination of the reduction that was expected going into the year was a was a plus for everybody right. So you've got that that's 4% on the total.
Project.
So that was towards the good and then you have these other.
Headwinds that developers and such and had been face and I think you know the.
The economics says we've talked for the year have.
And have not been as good as they would've been for projects, maybe a year ago, but they're still attractive. So you know.
And I think our customers continue to move forward and and I would characterize kind of 3 buckets of of.
Customers, if you will not necessarily equally spread but you have a group that is hey send me everything you can let's keep going go hard and you see that and our demand profile.
And have a group of of customers that are you know of just struggling getting say panels or what have you and that's the bucket that still wants to move, but they're just being disrupt a little bit by other some of their supply chain challenges and and you see some movement flow through on that and then you had the I'd say smaller group and these are typically the newer.
Newer folks into the marketplace that are more and a wait and see mode because of the inflationary environment.
And you know, it's the you've got 3 different scenarios there.
What I would say is are the returns on an and.
And these projects seem to be still.
It's still relatively attractive and.
And that's showing up and our demand.
As we've seen and the first half of the year and.
And our backlog.
So we're.
We're trying to help them find ways to.
And make those project economics of a little bit better there's ways. We can do that through the design of upfront of of the project itself.
And and helped them avoid maybe some of those planning cost et cetera, but it's a tough environment. You know in terms of you know every project is what it is but you know we're we're staying very engaged with them trying to help them navigate through each project across all the variables with the dealing with so.
Yeah, it's as we said the early.
Late last year and early this year. It's the you know we were out in front and engaging folks I don't think people and.
Dissipated this and I can't say I did not to the extreme.
But the walking hand in hand through this together has been I think very helpful with us and our customers no 1 likes it at the end of the day in terms of.
The impact but the world.
And you know we're learning how to manage it.
Right and it seems like the industries getting more rational perhaps around price and given the pressure on other competitors you face. The last question I have is could you talk to the sequential nature of.
The margins and specifically renewable but also a tip of the company and the second half for example, do you think renewable margins and it'll be up year over year and the second half where you basically have a high 12 handle.
And the renewable and then just comment if you could you know on any of the 3 or 4 key weighting overall that would help consensus. So we avoid surprises. Thank you.
Yes, I guess.
And a little hesitant to tell you what I think margins are going to do because they don't know what inflation is going to do and that will impacted them. So we see opportunity to improve.
But yes.
Material costs don't moderate.
And with both the speed and the.
And the the rate of change.
And I don't know that we would get ahead and so.
And we're set to be higher.
Higher margin.
Cross the business, I think or improving margins, but that's with the scenario that there is yeah not ramp and continued inflation that we have to go out and see quite yet right, but at today's net pricing and it sounds like you are.
Understandably, you don't want to comment about the spot or the commodity market, but in today's environment, given net price and it seems like it would be a favorable trend at todays known variables correct.
Yeah, I think I think the fair way to think about it is.
And at any given time, we are either working price to get to the current market or we'd gotten there just you know it depends on a kind of given day and across the businesses.
And so if we stayed at the current price definitely.
Thank you.
Yeah.
Okay.
Thank you. Our next question comes from Dan Moore with CJS Securities. Please proceed with your question.
Good morning, this of stuffs, calling in for Dan.
Good morning.
Morning.
And so on AG Tech what is your confidence that increases and the backlog will translate to revenue and the second half and are you seeing that happened already and a more material ready.
More material way and Q3.
Yeah, I think of.
Our plan for AG Tech has been the sequentially get better throughout the year the backlog that we have today reflects that the.
And contraction net.
Tim mentioned is really the shift from June to.
And to July and the first.
The first 3 weeks of July those projects, we thought were kind of in June just they've come through the <unk>.
Come through the process. So there, they're onboard now and they'll start being executed.
And when you think about the length of executing the project and when they'll start to flow through it does vary by end market, but the backlog is shaping up where they're going to be contributing and.
It will be contributing to the second half. So that's what gives us confidence that our plan to again continue to sequentially improve as is on track.
Got it. Thank you and then in terms of residential.
Yes, and tough comps coming up.
If you look forward into the next 4 quarters do you still expect to continue to generate positive growth and then also of how should we think about margin.
And I think the the growth profile there.
It's gonna be consistent and I think with what we see happen and the industry and and so obviously I don't think we're going to grow at the rates. We did last year, just because of the comps to your point are.
Pretty robust we had record quarter.
Quarters last year and history of the company for residential.
I think a lot depends on what happens with this inflationary environment at some point in time.
And consumers are going to vote with their pocketbook relative to pushing for it or not and and all of these variables that we've talked about with which we've assumed will stay in place for the next 6 months across all of our businesses you know, they're still out there and and.
And if they remain then and not get worse, but remain there and we'll see.
The margin recovery.
And the go forward if things continue to move up.
On inflation and then we'll have the we'll continue to chase those up and and just.
Maximize operating profit dollars.
So that is the you know the question, we think our margins will get better and.
And the assumption is that that the environment, we have today unemployment front.
The kind of holds where it is it doesn't get markedly worse.
The meaning things continue to go up.
But if it does go up further and further then we will maximize operating profit dollars and margins well.
Will will be delayed in terms of recovery.
And that's how that will work just like it has and the second quarter.
Great. Thank you for taking my questions.
Yep.
Thank you our next question.
The old Romero with Sidoti and company. Please proceed with your question.
Yeah.
Hi, good morning, everyone.
I really don't know.
And so I wanted to just I guess first day on ready.
Can you maybe rank order some of the headwinds you're facing there I know you mentioned price lagging inflation, but also some availability issues with material and labor.
Yes. So you know the inflation is still a still very high and as we all know.
And as I mentioned July wasn't the any better than the previous 9 months in terms of increase but I would say that availability of some of the materials that we were struggling with resident aluminum and particular starting to work themselves out we started to see that and in the latter half of second quarter.
So we feel like that 1 is as of heading into the positive direction.
Labor availability is is something that I think everyone's going to continue to struggle with for some period of time and depending on what happens with with the continues to happen with Covid and that could.
Cost and challenges for from folks, but we're managing through that pretty well. So you know.
That's just going to be a continuous the battles we move through the next couple of quarters.
So you know in place and the number 1 material availability starting to improve.
But still they're a bit and we still have strong demand we're trying to support it but you know we got out of the material coming in and.
That's getting a little bit better and then the third is is.
And any other drug disruption associated with with Covid, which I think you know like I said to this point, we've been managing relatively well.
Got it so it sounds like the the material shortages would be focused on you know non steel.
Right and steel you didn't get rid of it yes.
Okay, No steels and have not been an issue its really been aluminum and and.
And frankly, if you go back in time when the February.
Weather hit the Midwest It hurt.
A lot of suppliers.
And particularly those that are doing some value add and the alumina and the area of aluminum.
The resin has been impacted by a number of things so.
And those things have kind of worked themselves out but that gives you an idea of the magnitude of that weather disruption per 8 or 8 days or 10 days. It's just now kind of getting itself worked out but I feel like that's gotten better.
Understood and is there any way to think about you know what.
Once the oil starts to not stay on this upward trajectory of your you know just trying to think about how to quantify.
You know the impact of price lag of inflation, you know either from an operating income dollar standpoint of our or a margin standpoint.
Well 1 way to think about it is we don't need we don't necessarily rate relative to the rest of the year of need inflation to start going down and we just need it to to moderate and we just need it to flatten out.
Our assumption of our plan is that the everything stays elevated for the next 6 months.
In terms of input cost.
So if if.
If they if it's our input costs things like these major commodities.
And just subsides that'd be very helpful going forward and and our pricing.
And we'll start to read through and catch up.
What we don't know today, what I can't tell you today and if that is going to happen with inflation because again for 10 months in a row.
We've we've been wrong.
Everybody has been wrong and.
And that's the piece that's kind of the open card right now so we're assuming that everything stays elevated in the second half of them were assuming the price increases that we've actually put in place we implemented our fourth 1 yesterday.
Across the residential businesses those will start to catch up.
But if inflation continues to move up and we will continue to focus on like I said earlier maximizing the operating dollars and the.
The margin will recover as things subside and starting to move down.
Okay understood and I guess, just switching gears to <unk>.
Can you just talk about how the cannabis related businesses within AG are performing and and are the customers on the kind of aside the better access to working capital of better financing etcetera.
Yeah, they are and we've seen that and the backlog of cannabis backlog is starting to grow and Q2.
And that's 1 of the reason that the AG Tech will start to see improvement sequential proven and Q3 and Q4.
So that that backlog for growing structures as well as process and equipment has been steadily increasing and we mentioned earlier this re scoping.
Effect so.
When we had a couple of projects and cannabis that have gone through a couple of iterations, where a customer is.
You changed the scope of the project a couple of times. So it goes in and out of our backlog, we don't let it sit in our backlog if it's actually not confirm contracts. So we will take it out.
And our scenario, we had a pretty large project that went in and we took it back out that was the temporary contraction.
With the backlog they've since come back in and finalize the scope. So we put it back and because we don't want to have a false sense of backlog, but that's all cannabis oriented so that market I think is gaining momentum.
Which is what we anticipated and the second half and our backlog is reflecting that so you'll start to see those projects read through and and early our first 3 weeks of July was also very positive and and bringing more of that and.
Specific to Canada Okay.
Okay, and then I guess, just staying on and I'll talk you know of quick refresher on the thermo business within the AG Tech did you see any impact from those the projects that you had acquired you know when you first of all of that business. I think you know 18 months ago and and you know are you completely worked through those acquired projects.
Yeah, I think I think yeah. It was it came out of first quarter. We Gotta got most of the L. I'd say very very high percentage of that behind us.
Well, we had happened and and from the produce business.
It was more related just to some permitting delays.
And that the are.
Being workout, but but fundamentally the the drag that was created with the projects that came with the initial acquisition and I think or through the system and.
And now we're adding into that backlog of projects now that we're managing.
Yeah.
And that's it from me will drive a positive second half as well.
Great. Thanks, very much for taking the questions.
Yep. Thank you.
As a reminder, if you would like to ask a question. Please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is and the question Kipp.
Okay.
Our next question comes from Walter Liptak with Seaport Global. Please proceed with your question.
Hi, Thanks, Good morning, guys.
Hey, Walt.
Yeah.
And so I wanted to ask about a pair of smart and maybe a little bit more detail can you can you help us understand a little bit more about some of the integration that's going on and and maybe help us with some of the details about how those integration play through to you know getting to the the plant margins and is that at the.
The end of the year or is that and and 2022.
Yeah, so well.
Well a lot of and a lot of the synergy that we put into the acquisition plan.
It really starts to flow through in 2020.2 a lot of the work. We're doing now which is 80.20 slash lead efforts I think I mentioned in the previous call.
We started working on a couple of months ago is stuff. We're working on now to put in place and that will be I think those are those are things that helped drive the margin beyond that werent necessarily the original plan, but like anything we can't continue to go back and each of our businesses, whether it's the legacy core business or terrorist smart. They both went this through.
The same exercise and most recently.
Around the 80.20 of refresh and.
And we wanted to do that collectively because as we're integrating the businesses, we want to see where our best processes are and where our gaps are and where the opportunities exist et cetera. So that's identified.
And some additional opportunity for us that we'll be able to read through as we get things implemented and so.
But as it relates to this year and the margin what drives the terrorist smart if you looked at the.
First quarter second quarter when they doubled.
Essentially double the operating margin their models, a little bit different than RBI used to start with and so as you get into the busier season in Q3 and Q4.
Their field services of field operations portion of the business as the fixed cost model, whereas RBI has historically and variable costs. So when the quarters are lower and volume in terms of activity and the field.
They run the different margin profile, and then as they leverage leverage up with the the volume in Q3 Q4, that's when they accelerate and that's really.
And historically, what's been the case, there for them and you'll continue to see them.
And the drive for with margin and Q3 and Q4 because of that phenomenon just the way that they are they go to market with her field ops, it's not right or wrong, its just different and the way they've always done it.
And.
Well, we'll continue with both models because it really is project dependent but that's a core piece of of.
How the margins flow through the year, the weaker upfront or slower upfront and stronger and the second half and it's because of the construction cycle.
As more and more of our revenue and margin comes from those field ops not just the design and manufacture of the <unk>.
Of the materials that we put out for the field itself that makes sense.
Okay, Yeah that makes sense of as we start thinking about 2020.4 or just how terrorist smart fits into the picture do we when do we see that same seasonality to profits and the future too or was there more to the integration costs. The you know.
We don't have to worry about a lower profitability and the first half and then and I'll pick up and the second.
Well I think I think the seasonality and profitability may not change dramatically, but I think the overall absolute level for each portion of the year will go up and out of come through the integration and the synergy work that we're doing it. So Q1 is always going to be seasonally less lower margins, just because of volume and Q1 due to weather and all that good stuff, it's going to be less and it will.
B and your summer months, and so forth, but the ability to move up margins and each quarter relative to where they historically that is absolutely our.
The intent.
Okay, and where do we think the plan margins can get to.
So when we talk to and gender.
Yeah.
When the tariff smart came out of the 2020.
And I'm going to hopefully get the right about $147 million and sales and I think they ran the Tim 13.14 per cent.
I think it was operating day goes part and I think it was it was more around 12, though we said the combined business was already in the round.
Yeah, that's right sorry.
So that's the that's the starting point Walt starting point and then we said you know and the next 5 years, you know the business well.
<unk> reached 750 man. This is kind of all organic 700, plus million and and 15 plus percent operating income and and we're quite confident that the that we'll get there and and hopefully a little bit the little bit ahead of schedule you know the sooner than we thought but.
And that we have a clear path to and then I think some of the additional work that I just mentioned earlier, just some things that we'll be able to.
Secure of that or maybe take it up a little bit better as well or a little bit more as we kind of.
The figure a few things out but.
That's the that's the plan and and we feel good about that.
Okay Alright, great.
And then just just 1 of them in the backlog for renewables.
The the 54% growth.
Is there and organic backlog that you can talk about.
And so the.
Oh go ahead.
So when you say pro forma.
Well actually I think the 54 per cent Tim is the pro forma for for.
The renewal of wasn't renewables, that's correct yep.
And what that means simply is that's a that is the organic number if you will for the 2 businesses. So if I took last year's actual backlog for each business and this year's backlog for each business, it's up 54 per cent.
They both have contributed and both have backlog coming in and so it's a very robust demand profile for the business right now and it's frankly pretty consistent to what we saw in the first quarter as well. So the first half or renewables has been very good on organic backlog and frankly organic sales.
It's just the.
You know, it's a very busy busy environment right now for renewables.
Okay, Yeah, the and right and so it sounds like the you know based on the way you answered the questions too and I've been talking about it.
It's not the demand that there's any problem with there's not any kind of trends with supply chain and or price cost that are impacting demand. It's.
The the demand environment is that's fine.
Yeah. The only the only exception of that I would say and residential where we had some availability issues with the material.
And Q early in Q2 of aluminum, specifically and resin Ah that impact the demand a little bit, but and and in general of the rest of the residential.
The renewables amtech, we haven't really.
Had a big impact on demand because of the supply chain and stuff.
And we've had a couple of events I mean, Tim mentioned in his comments.
1 of our bigger Proteus projects and the quarter get moved because we had 11 week delay and and glass and.
Now that's just.
Yeah, it happened, but it's not.
That was a unique event that we think we're hopefully we're through but.
It was just wasn't of supplier couldn't get the glass to us and it wasn't demand issue is just literally didn't have labor at the port to pick the container off the ship.
And put it on a truck.
And it took 11 weeks to figure that out and you think of all that's crazy well at these labor shortages around the country are real and so we had a couple of minutes like that but in general well, yeah, you're right we.
<unk> been a demand issue.
Okay. Okay. Thank you.
Thank you there are no further questions at this time I would like to turn the floor back over to Mr. Bill Boswell and for any closing comments.
Yeah.
Well, thanks again, everybody for joining us today, we do have the busy investor marketing scheduled for Q3, including the Jefferies Industrial Conference Tomorrow.
And then the Seaport Global Summer conference and.
On August 24th as well as some other marketing dates and and we're looking forward to the reporting our progress and the third quarter earnings release.
And keep the counter open and we're planning on a shareholder day of Investor Day in November and hopefully in person and New York and stay tuned on that so thank you have a great day and everyone take care of stay say goodbye.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.